Venture capital investment in "digital health" companies grew 12% in the first half of 2013 to $849 million, and the number of deals leaped by 25%, compared to the prior-year period, says a report from health IT incubator firm Rock Health.

The sector's growth rate in dollars was not as torrid as it was in earlier years, and it fell far behind the 38% increase for all types of software. Yet the double-digit increase in venture funding of digital health stood in sharp contrast to the drop in investment in sectors like biotechnology and medical devices, Rock Health reports.

The 90 digital health companies tracked by Rock Health each raised $2 million or more from private investors. Proteus Digital Health, which makes "intelligent" medicine that includes sensor-enabled pills, a biometric sensor patch and smartphone apps, raised $45 million in its second round of funding. Health Catalyst, which sells an advanced type of enterprise data warehouse, received $41 million; Watermark Medical, which offers a home service that helps medical professionals diagnose and treat sleep disorders, got $32 million; NantHealth, which incubates multiple technologies to improve healthcare, received $31 million; and HealthTap, which enables consumers to ask doctors health questions online, raised $24 million.

The areas of digital health that attracted the most venture capital were remote patient monitoring, which received $102 million in 12 deals; hospital administrative software, $79 million in eight deals; analytics/big data, $78 million in seven deals; electronic health record systems, $69 million in eight deals; and mobile apps for wellness activities, $62 million in six deals.

Remote patient monitoring has captured a lot of attention this year mainly because of the rise of mobile apps and devices, said Malay Gandhi, chief strategy officer for Rock Health, in an interview with InformationWeek Healthcare. He cited Sotera Wireless, which makes a vital signs monitor that is strapped to a patient's wrist and transmits signals wirelessly. Whether worn in the hospital or at home, the device provides early warning signs of deterioration in the patient's condition.

This is an example of a "care anywhere" model that offers convenience and flexibility to providers and patients, he noted. "Patients may be out somewhere and the physicians are in a fixed location, or patients are in the hospital, and doctors can get access to what's happening with the patient wherever they are."

All of these products are already in demand, which is why a significant amount of capital is going into them, he said. "These aren't early stage rounds [of investment], where people are taking a risky bet. These are pretty good companies."

On the other hand, Rock Health's report points out, seed money for startup digital health firms is hard to come by. Gandhi explained that, in this space, "angels" (wealthy individuals) and "micro-VCs" (venture capital firms that specialize in startups) are the traditional sources of funding. But in digital health, there are few angels, compared to the number in the tech industry as a whole, he said.

Micro-VCs are typically capitalized, he said, at under $100 million. They focus on early-stage investments, providing anywhere from $100,000 to $1 million to a particular company. But there's no micro-VC designed specifically for digital health, he said.

Some digital health companies start with family or personal money and, when they grow large enough, go public. Those are mostly firms that sell services to healthcare organizations and can build a customer base quickly enough to sustain themselves, Gandhi said. "But Internet companies need outside capital to grow their business while they figure out a business model," he pointed out. Hence they require venture capital to make it until they're big enough to attract public investment.

Gandhi believes there's a lot of upside potential in digital health, largely because of healthcare reform. "A lot of infrastructure is being put in place now," he said. "And you can build large companies on the basis that we have payment transformation and technology transformation. These are things you need in place to create valuable new companies outside of the traditional health services area like insurance and large hospital chains."

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